Tax Planning

Welcome to Straight Talk.  Straight Talk is just that. I don’t mince words. I tell it like it is.

I have reached an age where the nonsense, the B.S. and the snake oil salesman who don’t know what they are talking about just won’t do. I have over 35 years of experience in my industry, advanced degrees and countless hours coming alongside business owners to build rock-solid foundations and use the most advanced business, legal and tax ideas and strategies to save tens of thousands to hundreds and yes even millions of dollars, protect what you have and increase your lifetime net worth.

I appreciate your enjoyment of our insights on growing your business by design, changing your wealth and increasing your choices.

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Have you ever wondered why you get a tax deduction for contributions to charity?  

Tax policy and social policy.  If the government can get the private sector to make donations to those that are less fortunate those are expenses that the government does not have to incur and they can use the tax revenue for other social purposes.

Contributions to charity have long been a part of the tax code.  There are two types of primary charities.

First is the kind most people are familiar with which are the 501(c)(3) organizations.  These include Red Cross, Churches, Temples, Salvation Army and so forth. The second type of charities are private foundations like the Gates Foundation, or the Kroc Foundation or Scripps Foundation.  

There are also social clubs like Rotary and Kiwanis.  Depending on the type of charity, the deductions are different and the deductions are different based on the type of property donated to the charity.  Here are some of the rules.

1. If a person contributes to the familiar charity the amount of the contribution can be 60% of the adjusted gross income that is shown on your tax return.  

Adjusted gross income is the total income that you make less a few deductions such as moving expenses, one-half of the self-employment tax and a few others.  If you make $100,000 you could contribute up to $60,000 to a charity.

2. If a person makes a contribution to a private foundation the amount of the deduction is only 30% of a person’s adjusted gross income.

I often get asked:  what is the difference between a contribution to a familiar charity versus a contribution to a private foundation?

Part of the answer I give is that if the private foundation is formed for your own family.  A private family foundation is a strategy used in the tax law allowing a family to create their own charitable foundation to which they can contribute, get the charitable deduction and then use that foundation for charitable purposes in the community.  

Having your own family foundation gives you more control as to the vision and purpose for the foundation, the programs that the foundation will run and who will be employed.  Control over funds stays within the family.

The type of property you contribute to a charity makes a difference.  

Cash is simple.  You receive the tax deduction described above.  Property is another story.

There are two types of property:

• Personal property like artwork.  
• Real estate.  

Simply, when there is a contribution of property, whether personal or real property,  the tax deduction is the fair market value of the property unless the fair market value is less than what you paid for it in which case what you paid for it will be the amount of the deduction.  

The deduction can take is limited if your property hasn’t been held for more than 1 year i.e. the gain is short-term capital gain.

Contributions of real estate to private foundations are further limited to the price you paid for the property.  

If there is appreciation in that real property it is treated as if you sold the property first, paid the tax on any gain and then made the contribution.  For what may seem like obvious reasons, this rule was intended to prevent abuse by families forming their own foundations and then contributing their own appreciated real estate and receiving the tax deduction.  

You might be wondering what’s the real difference if a taxpayer simply made the contribution of the real estate to a regular charity?

No such limit in the charitable deduction would be imposed.  

It seems this is an arbitrary judgment that family foundations are somehow less charitably minded or are being used for abuse.  I would rather presume the charitable purpose is valid and then show the abuse. Isn’t that like innocent until proven guilty rather than guilty and pay the tax.

Our vision is to enhance the way people think and talk about wealth not only in money but in values, beliefs, and traditions.  

Our mission is guiding people in Mastering the 5 Stages of Wealth.  Survival to make ends meet; Security for themselves and their family; Affluence by enjoying the benefits of the wealth created; Influencing others through one’s own clarity of purpose and vision; and Legacy of the impact and difference you can make in the world and how you will be remembered.

Thank you for being a part of our Straight Talk community.

Our goal is to educate, transform and inspire business owners and families in enhancing the way they think and talk about wealth in money, values, beliefs, and traditions.  

What is your Legendary Future?  We welcome you to share your ideas and thoughts.

Welcome to Straight Talk.  Straight Talk is just that. I don’t mince words. I tell it like it is.

I have reached an age where the nonsense, the B.S. and the snake oil salesman who don’t know what they are talking about just won’t do. I have over 35 years of experience in my industry, advanced degrees and countless hours coming alongside business owners to build rock-solid foundations and use the most advanced business, legal and tax ideas and strategies to save tens of thousands to hundreds and yes even millions of dollars, protect what you have and increase your lifetime net worth.

I appreciate your enjoyment of our insights on growing your business by design, changing your wealth and increasing your choices.

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Everything we do is risky.  Crossing the street, going into business, flying on airplanes, making decisions about how to protect our money.  

One of the ways to protect our money is to keep it from the IRS.  Tax professionals since time began have been using the rules, regulations and case law, to find words, ideas, strategies and tactics to get around paying money to the IRS.

As attorneys, what is our role?  

Our role is to advise people on our understanding and opinion of the law based on our training and experience.  

Our training is hours and hours of questioning, testing, interpreting and learning how to read, understand and make determinations about the rules, the regulations, how the courts think about those rules and regulations and to advise as to what can and can’t be done.  Of course what can and can’t be done can be subject to black, white and a lot of gray.

Tax attorneys do the same thing except with a specialized knowledge of tax law.  

We are the cream of the crop.  There are no professionals who have specialized knowledge and training greater than the tax attorney.  

The role of the client is to make one decision.  Either agree or disagree with the advice. This is all based on the level of risk a client is willing to take.  

Here is how the story unfolds…

Client wants to do something and they come to us to ask our advice in advance of doing the transaction or to provide our thoughts about the consequences of the transaction already engaged.

For example, a client wants to start a business and they want to know the boundaries of what they can do to take deductions that might create losses to lower taxes.  

Seems simple enough…Then the discussion starts.  

Well, are you working full time in another business?  How much time will you be spending on this other “business”? What will you be doing?  Where are you going to run the business? Where will your clients come from? How much money will you make?  I think you start to get the idea. Because, if the IRS wants you, guess what? They will start asking these same questions.

What happens here is that the client wants to find ways to create tax deductions for expenses that are on the surface for a business when there is no real business because the client made no money, operated the so called business from home, wasn’t really working many hours didn’t have clients and so forth.

Now the client is unhappy…Why?

I thought we were doing what we were trained to do.  Well, the client is unhappy because there are other people who are not trained tax attorneys giving the client the advice that they can do these things and take the deductions.  Risk.

For us tax attorneys, this is called putting the license to practice law in jeopardy and as the old saying goes in the movie “A few good men”, it’s not what I know but what I can prove.  Our job as tax attorneys is to know and prove in Court that what the client is doing and saying is consistent and in accordance with the law. Otherwise, it’s called fraud and some fraud lands you in jail.  It also results in penalties and interest.

I for one am not willing to risk my license for a client’s risk.  

Here is what makes our job even tougher….The client asks our advice and we give it.

Then the IRS examines the tax return.  Like anyone, the IRS has an agenda so they may only look at one aspect of the return.  That’s good. The problem is that if the client was doing the risky stuff on a different part of the return, the attitude that comes out is well the IRS didn’t think there was a problem with this part of the return so it must have been correct.  

That is false and misleading.  

The other part of the return may have been completely incorrect but the IRS wasn’t looking to get into that part of the return because of their agenda.  The client now thinks the return is valid because the IRS didn’t investigate all of the return, and we the tax attorneys have to somehow explain to the client that fate doesn’t mean the advice was incorrect or that the actions and the risk was correct.  

Of course to the client, they wonder what advice they were getting as it related to the incorrect conduct only because they weren’t caught?  

The answer is the client was getting the exactly correct advice.

But I am just a tax attorney.  What do I Know?

Our vision is to enhance the way people think and talk about wealth not only in money, but in values, beliefs and traditions.  

Our mission is guiding people in Mastering the 5 Stages of Wealth.  Survival to make ends meet; Security for themselves and their family; Affluence by enjoying the benefits of the wealth created; Influencing others through one’s own clarity of purpose and vision; and Legacy of the impact and difference you can make in the world and how you will be remembered.

Thank you for being a part of our Straight Talk community.

Our goal is to educate, transform and inspire business owners and families in enhancing the way they think and talk about wealth in money, values, beliefs and traditions.  

What is your Legendary Future?  We welcome you to share your ideas and thoughts.

Welcome to Straight Talk.  Straight Talk is just that. I don’t mince words. I tell it like it is.

I have reached an age where the nonsense, the B.S. and the snake oil salesman who don’t know what they are talking about just won’t do. I have over 35 years of experience in my industry, advanced degrees and countless hours coming alongside business owners to build rock solid foundations and use the most advanced business, legal and tax ideas and strategies to save tens of thousands to hundreds and yes even millions of dollars, protect what you have and increase your lifetime net worth.

I appreciate your enjoyment of our insights on growing your business by design, changing your wealth and increasing your choices.

I love using tax rate planning when we can.  Tax rate planning comes into play in two primary situations.  

The first is when your business has grown from stability and has been expanding.

I call this the fat, dumb and happy rule.  When you are doing everything you want to do but the money you are making is simply being taxed at the highest tax rates, then it’s time to start looking at using tax rate planning to your advantage.

Most companies in their early stages are formed as S corporations and this is a good thing.  

Profits flow through to you personally and are taxed to you personally usually at lower tax rates in the beginning. However, when you begin to start making too much money, you money is taxed at the highest tax rates. Once this happens creating a different tax structure for your company can create some real tax advantages.  Simply put, if you change the nature of your tax entity, income up to 100,000 can be taxed at rates that are much lower than you would pay on the same income if you simply included that income on your personal return.

I was working with a client where we did just that. We change the structure of his company and his savings every year will now be in the hundreds of thousands of dollars.  I realize not everyone is in that position, however, what if it were tens of thousands of dollars EVERY YEAR! How good would that be?

The second type of planning involves family.  

Some family members may be in a lower tax bracket than other family members.  Of course, this works best when we are dealing with a family business or possibly real estate.  

The goal in this situation is to shift income from the family member who is making higher dollars and being taxed at higher rates to family members who are in a lower tax bracket, such as the children.

Before running headlong and implementing this strategy, you have to be careful of a crazy rule called the kiddie tax which is a rule dreamed up to cause passive income going to the children to be taxed instead to the parent’s or at the parent’s tax rate.  So much for income shifting.

Except, if the children are actually earning money then there are some great benefits and planning that can be done.

Thank you for being a part of our Straight Talk community.

Our goal is to educate, transform and inspire business owners and families in enhancing the way they think and talk about wealth in money, values, beliefs and traditions. If you would like to learn more or get together to see if these rules might.  

We welcome you to share your ideas and thoughts.

Welcome to Straight Talk.  Straight Talk is just that. I don’t mince words. I tell it like it is.

I have reached an age where the nonsense, the B.S. and the snake oil salesman who don’t know what they are talking about just won’t do. I have over 35 years of experience in my industry, advanced degrees and countless hours coming alongside business owners to build rock-solid foundations and use the most advanced business, legal and tax ideas and strategies to save tens of thousands to hundreds and yes even millions of dollars, protect what you have and increase your lifetime net worth.

I appreciate your enjoyment of our insights on growing your business by design, changing your wealth and increasing your choices.

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Are you a business or a hobby?

This question comes up often for taxpayers who have 2 or sometimes 3 activities some of which are making money and some of which are not.

How can a person run 2 or 3 different businesses and intend to make money in all of them?

If a business is not considered a business then it is a hobby.  If it is a hobby, whatever expenses are incurred can only be deducted up to the amount of income and not beyond.  This means most people want to treat their activities as a business so they can take deductions greater than their income.

But what is a business?

In the tax law, a trade or business is defined as a regular activity engaged in with a profit motive.  A hobby is defined as an activity not engaged in for profit. These seemingly simple definitions have spawned enormous amount of regulations and case law.

Some of the rules and principles relating to whether an activity is a trade or business or a hobby are summarized below.

If an activity actually makes a profit 3 out of 5 years, then the presumption that is was a hobby will not apply.  

This means that if you operate what you want to be a business for 5 years and you have a profit in three of these years, then the other two years you can have losses that can offset other income.  

While you may think this could be easy, i.e. just show 1 dollar of profit, it isn’t quite that simple.  The amount of profit in relation to losses, the taxpayers investment and the value of the assets used in the activity may all have a bearing on whether there was an intent to make a profit.

We all know the classic Mary Kay home based business used for the purpose of receiving office in the home deductions and losses.  This is a classic business versus hobby conflict.

Here’s a story of where losses were disallowed for Amway distributors:

An Amway distributor did not establish a profit motive where he made only three sales in the year in issue with a gross profit of $41, although he held numerous social events to recruit friends, relatives, and acquaintances to the Amway system for which he claimed $32,432 in business expense deductions.

Similarly, another Amway distributor failed to establish a profit motive for the one year at issue where gross profit was $627, additional bonuses of $1,516 were received from Amway, but expenses were $15,781. 15.1

9 factors that go into the consideration of whether there is an intent to make a profit:

1. The manner in which the taxpayer conducts the activity.
2. The expertise of taxpayer or his advisers.
3. The time and effort taxpayer spends on the activity.
4. The expectation that assets used in activity may appreciate in value.
5. The taxpayer’s success in similar or dissimilar activities.
6. The taxpayer’s history of income or losses with respect to the activity.
7. The amount of profits.
8. The taxpayer’s finances
9. The elements of personal pleasure or recreation

Here is where most people get into trouble.  

They are a full time employee receiving a paycheck and then they have what they call a side business.  

The problem arises in substantiating the number of hours spent on the business, networking, business cards, performing the services, accounting and the like.  I am not suggesting that this can’t be done as there are people who run side businesses after work and on week-ends, however there is only so much time in a day.

Showing how profit will be generated when working a full time job may be difficult.  

Coming back to the Mary Kay example, leveraging the downstream people to generate business and revenue is an example of how a person may show they have a business in addition to other work.

The point of this blog and the ones on mileage and charitable deductions hopefully is to point out that the rules are very complex, with many exceptions, nuances and traps.

There are opportunities for business owners to take advantage of the tax laws and having the right advice is critical.  

As I stated in my last blog I am trained as a tax attorney.  That means I have the legal experience and I have highly specialized tax training as well.  This means that when there is a tax question, I have the full understanding of the legal nuances, hidden meanings, rulings and interpretations of the case law.  It’s not enough just to hope and pray the IRS won’t exam your return. It’s what I can advocate on your behalf and prove.

Our vision is to enhance the way people think and talk about wealth not only in money, but in values, beliefs and traditions.  

Our mission is guiding people in Mastering the 5 Stages of Wealth.  Survival to make ends meet; Security for themselves and their family; Affluence by enjoying the benefits of the wealth created; Influencing others through one’s own clarity of purpose and vision; and Legacy of the impact and difference you can make in the world and how you will be remembered.

Thank you for being a part of our Straight Talk community.

Our goal is to educate, transform and inspire business owners and families in enhancing the way they think and talk about wealth in money, values, beliefs and traditions.  

What is your Legendary Future?  We welcome you to share your ideas and thoughts.

 

Welcome to Straight Talk.  Straight Talk is just that. I don’t mince words. I tell it like it is.

I have reached an age where the nonsense, the B.S. and the snake oil salesman who don’t know what they are talking about just won’t do. I have over 35 years of experience in my industry, advanced degrees and countless hours coming alongside business owners to build rock-solid foundations and use the most advanced business, legal and tax ideas and strategies to save tens of thousands to hundreds and yes even millions of dollars, protect what you have and increase your lifetime net worth.

I appreciate your enjoyment of our insights on growing your business by design, changing your wealth and increasing your choices.

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By the fourth quarter, doing tax planning is most likely too late.  

If you have some revenue that you can hold until next year that might help in pushing off tax.  If you can take some deductions that can help in reducing your revenue for this year and save some tax.  Beyond that, if you waited until now, there is not much that can be done.

My tax tip for those who have waited is to get an early start on your tax planning beginning with the start of the New Year.

What are your next year’s goals for revenue, for expansion, for sale?  

Whatever those goals, bring your professionals in early so they can be of the greatest value in structuring activities to take advantage of the laws.  Meet regularly, devise a plan, a strategy and tactics to implement the strategy.

Review what is working and not working.  Make revisions and provide yourself with the best chance to grow your business by design.

Our vision is to enhance the way people think and talk about wealth not only in money, but in values, beliefs and traditions.  

Our mission is guiding people in Mastering the 5 Stages of Wealth.  Survival to make ends meet; Security for themselves and their family; Affluence by enjoying the benefits of the wealth created; Influencing others through one’s own clarity of purpose and vision; and Legacy of the impact and difference you can make in the world and how you will be remembered.

Thank you for being a part of our Straight Talk community.

Our goal is to educate, transform and inspire business owners and families in enhancing the way they think and talk about wealth in money, values, beliefs and traditions.  

What is your Legendary Future?  We welcome you to share your ideas and thoughts.

Welcome to Straight Talk.  Straight Talk is just that. I don’t mince words. I tell it like it is.

I have reached an age where the nonsense, the B.S. and the snake oil salesman who don’t know what they are talking about just won’t do. I have over 35 years of experience in my industry, advanced degrees and countless hours coming alongside business owners to build rock solid foundations and use the most advanced business, legal and tax ideas and strategies to save tens of thousands to hundreds and yes even millions of dollars, protect what you have and increase your lifetime net worth.

I appreciate your enjoyment of our insights on growing your business by design, changing your wealth and increasing your choices.

The days are getting shorter.  We have more to do. Where is the time?

There is no time like the present.  When it comes to year-end planning for your business, planning for taxes, planning for next year there is no time like the present.  

Once the year is over, from a tax perspective there is no planning.  It’s purely compliance. What did you do and now we have to record it.  That’s why the accountants are called bean counters. They count what has been done and they report it on the tax return.  And if the IRS comes a calling, the information and the actions taken have all been accounted for.

Occasionally, it is possible to take information and re-characterize it in a way that is favorable to you.  

Was the skin cream you sold as part of Mary Kay or that juice part of Juice Plus a business or just a hobby.  Were you really a real estate professional. Did you have to use your home for business and were you running a business or did you get a W-2 from your employer and that’s your income.  

One and done.

Here are some time-honored rules and principles.

Tax Saving Tip #1:

The new tax law should reduce people’s tax rate. That means that pushing more income into the current year and delaying deductions will benefit the business because there will be less taxes even on more income.   

Tax Saving Tip #2:

Look at your investments and sell some of the losers to offset the winners.

I know you will all get a kick out of this one.  Passive income and losses from real estate is different from than passive income and losses from investments.  Passive losses from real estate have medieval type rules to keep you from taking those losses to offset income from wages or a trade or business.  Worse yet, income from real estate can’t be offset by losses from stocks. Guess who made up these rules and the effect on you is take more of your money.

Tax Saving Tip #3

One I always like is if you drive in your business keep track of the miles you drive.  It’s a free one that the IRS gives you.

Think about it.  The IRS gives you about 50 cents per mile.  If you drive 20,000 miles you get a 10,000 deduction and it didn’t cost you anything other than the gas and repairs you would make anyway.  

Tax Saving Tip #4:

Last on the list is if you have your children working in your business there are some tremendous advantages you can use to save taxes.

Our vision is for people to have a legal that will make them proud. What better way to do this than to bring kids into the business where you can pay them, get a deduction and begin putting their money into investments that could turn them into millionaires when they are older. How good is that?

Thank you for being a part of our Straight Talk community.

We welcome you to share your ideas and thoughts.